Fed gauging weather's effect on economy, Yellen says

Friday

Feb 28, 2014 at 12:01 AMFeb 28, 2014 at 6:32 AM

WASHINGTON - Federal Reserve chairwoman Janet Yellen noted yesterday that recent economic data have pointed to weaker-than-expected increases in consumer spending and jobs. She said the Fed will be watching to see whether the slowdown proves to be only a temporary blip caused by severe winter weather.

WASHINGTON — Federal Reserve chairwoman Janet Yellen noted yesterday that recent economic data have pointed to weaker-than-expected increases in consumer spending and jobs. She said the Fed will be watching to see whether the slowdown proves to be only a temporary blip caused by severe winter weather.

Yellen’s comments gave encouragement to Wall Street. Investors read the remarks as offering at least a hint that the Fed might slow or suspend a pullback in its economic stimulus if the economy falters.

“We have seen quite a bit of soft data over the last month or six weeks,” Yellen said, citing job growth, housing, retail sales and industrial production.

She said the Fed needs to “get a firmer handle on exactly how much of that set of soft data can be explained by weather, and what portion, if any, is due to a softer outlook.”

In her remarks to the Senate Banking Committee, Yellen repeated the Fed’s assurances that its pullback in its bond purchases is “not on a preset course” and could be modified in the event of a “ significant change” in the Fed’s outlook. The Fed is gradually reducing its monthly bond purchases, which have been intended to keep long-term loan rates low to encourage spending and growth.

Yellen said that although she is open to adjusting the pace of the Fed’s reductions in bond purchases, “I wouldn’t want to jump to conclusions” that such a change will be needed.

Still, investors took heart from her comment that the Fed is concerned about the weaker economic data and watching to see whether the slowdown is temporary or persistent.

In prepared testimony she gave two weeks ago to a House committee and yesterday to the Senate panel, Yellen said that the job market’s recovery is “far from complete” and that she expects Fed policies to favor low interest rates “for quite some time.”

Most economists say they expect the Fed to stick to its plan for a steady reduction in bond purchases unless the economy significantly weakens in coming months.

“The market is hopeful that they can count on her not to be too aggressive in tapering bond purchases,” said David Jones, chief economist at DMJ Advisors. “But in essence, she said she was not going to deviate from the policy course that has been set in terms of reductions in bond purchases.”

Yesterday’s appearance completed Yellen’s first of the Fed leader’s twice-a-year reports to Congress. She became Fed chairwoman this month. Her Senate appearance had been postponed by a snowstorm that shut federal offices in Washington on Feb. 13.

In both her House and Senate appearances, Yellen sought to emphasize policy continuity from her predecessor, Ben Bernanke, who stepped down last month after eight years as chairman. Yellen said that she, like Bernanke, thinks the economy is strengthening enough for the Fed to gradually scale back its bond purchases.

The Fed has cut the pace of its purchases at both of its most-recent meetings. It originally spent $85 billion a month, but cut that by $10 billion in both December and January, to a pace of $65 billion.

Many economists think that as long as the economy keeps improving, the Fed will cut the bond purchases by $10 billion per meeting, until ending the program in December.

The Fed has stressed that it’s standing by a plan to keep a key short-term rate at a record low near zero for an extended period. At the past two meetings, it has said short-term rates probably will remain low “well past” the time when unemployment drops below 6.5 percent. The jobless rate is 6.6 percent.

Many economists think the first rate hike won’t occur until late 2015. But minutes of the Fed’s most-recent meeting showed that “a few” policymakers felt it might be appropriate to make the first move to raise short-term rates “relatively soon.”

The Fed has held its benchmark for short-term rates near zero since December 2008.

The discussion revealed in minutes of the Fed’s Jan. 28-29 meeting, released last week, drew the attention of financial markets. The “few” Fed officials who raised the possibility of a rate hike weren’t identified.

Some Fed officials have worried that the efforts to provide support for the economy through trillions of dollars in bond purchases and ultra-low rates could eventually spark inflation pressures.

Economists think that Fed group remains in the minority. Yellen and many other Fed officials say the economy still needs support from the Fed until the job market and economic growth improve further. They note that inflation remains well below the Fed’s 2 percent target.

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